March 17, 2022
Fed Hikes 0.25%; Signals Six More in 2022
Fed raises interest rates for first time since 2018 and signals intentions for 6 more hikes in 2022.
At its meeting today the FOMC voted to raise the Federal Funds rate to 0.25%-0.50%. Bullard dissented, preferring a rate of 0.50-0.75%.
The statement noted that the Fed will begin reducing its balance sheet holdings at a coming meeting.
In its summary of economic projections, the Fed updated their projections to show slower real GDP growth and faster inflation than in December.
The statement noted strength in the pace of job gains, inflation remaining elevated, and the inflationary impact of the invasion of Ukraine by Russia.
The Summary of Economic Projections included increases to the median Fed Funds Target Rate forecast:
By year-end 2022: from 0.9% to 1.9%.
By year-end 2023: from 1.6% to 2.8%
| Variable | ||||
| 2022 | 2023 | 2024 | Longer Run | |
| Change in real GDP | 2.8 | 2.2 | 2.0 | 1.8 |
| December projection | 4.0 | 2.2 | 2.0 | 1.8 |
| September projection | 3.8 | 2.5 | 2.0 | 1.8 |
| June projection | 3.3 | 2.4 | 1.8 | |
| Unemployment rate | 3.5 | 3.5 | 3.6 | 4.0 |
| December projection | 3.5 | 3.5 | 3.5 | 4.0 |
| September projection | 3.8 | 3.5 | 3.5 | 4.0 |
| June projection | 3.8 | 3.5 | 4.0 | |
| PCE inflation | 4.3 | 2.7 | 2.3 | 2.0 |
| December projection | 2.6 | 2.3 | 2.1 | 2.0 |
| September projection | 2.2 | 2.1 | 2.1 | 2.0 |
| June projection | 2.1 | 2.2 | 2.0 | |
| Core PCE inflation | 4.3 | 2.7 | 2.3 | |
| December projection | 2.7 | 2.3 | 2.1 | |
| September projection | 2.3 | 2.2 | 2.1 | |
| June projection | 2.1 | 2.1 | ||
| Fed funds rate | 1.9 | 2.8 | 2.8 | 2.4 |
| December projection | 0.9 | 1.6 | 2.1 | 2.5 |
| September projection | 0.3 | 1.0 | 1.8 | 2.5 |
| June projection | 0.1 | 0.6 | 2.5 | |
2022 Year End Dot Plot Evolution:
2023 Year End Dot Plot Evolution:
Messaging at the press conference:
At the press conference, Chair Powell focused on what he characterized as an extremely strong labor market, with increasing wages and participation.
Inflation remains above the FOMC’s target. Demand is strong and supply chain bottlenecks have continued longer than expected, alongside commodity-price pressures from the invasion of Ukraine. The FOMC now expects inflation to take longer to reach their long-term goal than previously expected.
Chair Powell noted that potential impacts of the invasion of Ukraine by Russia are highly uncertain but include higher commodity prices and potentially tighter credit conditions.
Every 2022 meeting is a “live” meeting, so policy rate increases are probable even on meeting dates that do not include new economic projections.
Market reaction:
The market sold off upon the release of the statement but rallied throughout the duration of the press conference.
Bond yields popped higher with the 10 year hitting 2.24% before falling slightly during the press conference.
The dollar strengthened slightly during the press conference. Gold and Oil prices fell.
| Prev. Close | Open | 2pm | 2:45pm | % change Prev Close | % change Open | % change 2pm-2:45pm | ||
| S&P 500 | $ 4,262.45 | $ 4,288.14 | $ 4,298.49 | $ 4,296.55 | 0.80% | 0.20% | -0.05% | |
| Dow Jones Industrial Average | $ 33,544.34 | $ 33,653.93 | $ 33,798.41 | $ 33,651.33 | 0.32% | -0.01% | -0.44% | |
| Nasdaq | $ 12,948.62 | $ 13,119.40 | $ 13,222.07 | $ 13,170.86 | 1.72% | 0.39% | -0.39% | |
| 10 Year Treasury Rate (%) | 2.16% | 2.15% | 2.19% | 2.22% | 0.06% | 0.07% | 0.03% | |
| US Dollar | $ 99.10 | $ 98.89 | $ 98.74 | $ 98.84 | -0.26% | -0.05% | 0.11% | |
| Gold | $ 1,917.84 | $ 1,917.83 | $ 1,914.33 | $ 1,910.20 | -0.40% | -0.40% | -0.22% | |
| Oil | $ 96.44 | $ 95.23 | $ 96.00 | $ 94.50 | -2.01% | -0.77% | -1.56% |
Our takeaways:
The Fed continues to view the health of the US economy as strong and has grown more concerned about inflationary pressures in the economy.
As a result, the Fed is taking the first step toward addressing inflation by raising interest rates today and communicating their expectations for future increases.
In the Q&A, Powell noted that there are 7 hikes projected for this year (6 additional after today), and 7 meetings on the calendar in 2022. He characterized every meeting as “live”, so a reasonable expectation appears to be a 0.25% increase at each of the next 6 meetings.
The invasion of Ukraine by Russia was mentioned several times as creating near-term inflationary pressures and diminishing growth in 2022. Commodity prices have risen and it is likely the invasion will exacerbate existing supply chain problems.
Looking ahead, we are interested in learning more about the Fed’s plans for balance sheet run-off. We expect to receive this information in May.
Finally, this is the first meeting where the Dot Plots have included rates above the long-term neutral policy rate. A 2.8% rate projected for year-end 2023 is above the long-term neutral rate of 2.4%. So, the Fed is signaling its willingness to move rates into ‘restrictive’ territory to deal with inflation.
Overall, these moves were well-anticipated by the market. Investors were projecting 7 interest rate hikes for 2022 coming into this meeting, and that is what the Fed communicated today.